Negative Rates: We’re Going to Need a Bigger Vault

I always liked the famous scene in the movie Jaws where the film’s hero, police Chief Brody, finally gets a close-up look at the size of his killer shark nemesis.

“We’re gonna need a bigger boat,” he says, incredulous at the size of the monster fish.

These days, we have a monetary nemesis called negative rates. It’s already a reality in Japan and the European Union.

But large banks, incredulous at being forced to store their digital cash at the European Central Bank (ECB) – and paying for the privilege – have a strategy to deal with this ongoing financial horror show, summed up as…

“We’re gonna need a bigger vault.”

Back in March, I noted how Germany’s Munich Re, one of the largest financial institutions in the world, threatened to load up on lots and lots of physical cash (and some gold) and stuff it into the vaults it controls.

Last month, another German banking giant, Commerzbank, let it be known that it too is likely to do the same if the dummkopfs at the ECB insist on maintaining negative rates.

And it’s not just those dour Deutschland bankers. Their counterparts in Japan are brewing their own revolt against negative rates.

Hara-kiri Monetary Policy

The Bank of Tokyo-Mitsubishi (BTMU) – one of the 10 largest banks in the world – recently announced an action that would have been unthinkable in normal times.

BTMU is part of an exclusive club of large banks and brokers that are the primary dealers of Japan’s sovereign debt. But in June, BTMU shocked everyone by threatening to drop its membership in the primary dealer group.

It’s a radical move in the tight-knit world of Japanese banking, where everyone is expected to support the government line. But even Japan’s conservative banking culture has its limits when it comes to negative rates.

Thanks to Japan’s radical Abenomics stimulus efforts, Japan’s central bank buys up most of the government-issued debt anyway. In 2013, the central bank owned less than 15% of Japan’s government bonds. Today, it’s more than 30%… and rising.

And with interest rates (and bond yields) in negative territory, who in their right mind (besides those deluded central bankers) would want to buy Japanese government debt anyway? For financial institutions like Bank of Tokyo-Mitsubishi, why bother with staffing a bond desk to begin with?

Safe-Deposit Shortage

Negative rates aren’t just spurring European banks to consider a cash-heavy, vault-stuffing strategy. Regular folks are doing it too.

At some banks in Germany, demand for safe-deposit box rentals is three times what it was just a handful of years ago. At others, 80% of all the deposit boxes are already leased out. In smaller branches, it’s tough to find a deposit box at all.

The CEO of EGF, a German company that manufactures safe-deposit boxes, told one publication that they’re selling 20,000 boxes a year to banks, “and demand is still rising.”

And what are people putting into those vault-stored safe-deposit boxes?

Some might disagree as to whether it’s the right idea to store cash and gold inside a bank, rather than in a personal safe. But the point is, Europeans and their financial institutions – now yoked to the onerous burden of negative rates – are learning the hard way why such stores of wealth are so important to have close at hand.

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The Key To A Successful Global Economy

When we think of a global economic system we would like to envision a world free of the retching poverty, disease, the corruption of political systems, the economic instability of some countries, the selfish dominance of leaders [ in that they refuse to ease the undo suffering of their people ] and a world that really can’t find lasting peace between nations. You just have to look to nations like what happened in Libya and other countries in Africa as well as Syria and North Korea today to understand that there are leaders who continue to deny their populations basic liberties.

There are three major factors that continue to undermine a successful global economy; 1. The World Bank and the International Monetary Fund, 2. The World Trade Organization, and 3. The North Atlantic Free Trade Agreement. The World Bank and The International Monetary Fund are the biggest financial lenders in the world today, the problem is they are also the biggest loan sharks, keeping the poorer countries impoverished while at the same time helping multinational corporations exploit nations natural resources. This does nothing to ease the vast suffering of people all over the world and further diminishes the prospect for further economic growth and nations stability. What is needed is for the World Bank and the International Monetary fund to work together with the United Nations in setting up loan programs for countries that need the tools and resources to successfully stabilize and grow their economic structure.

The World Trade Organization was set up to foster economic growth between all nations, but since the world is still plagued with turbulent and intensifying crisis the prospect for economic growth appears grim. Like the WTO the North Atlantic Free Trade Agreement has done just the opposite of what it was intended to accomplish. It has left the agriculture industry with monumental job losses, made life saving medicines unaffordable for people in poorer countries, and lowered health, safety and environmental standards everywhere. Negotiations are already taking place to expand NAFTA by creating trade zones from Argentina to Alaska which NAFTA gives corporations rights to reduce natural resources at the expense of Democracy in Mexico, Canada, and the United States resulting in further loss of jobs and reduction of environmental and health standards everywhere.

A key player on the international scene is China. Back in 1990 China’s government adopted the policy that they will become the cheapest place to manufacture everything. Today, they have pretty much accomplished that fact. The problem though in China is that the divisions between the prosperous cities and the long stagnant economic deprived rural areas threaten the long term stability and growth of China and with that the rest of the worlds economic stability would be in serious jeopardy.

From 1993 – 2008 the United States alone lost more than 3 million jobs due to the North Atlantic Free Trade Agreement. The rising United States trade deficit has cost more than 4 million actual and potential jobs since 1994. The US trade deficit with China alone is over $200 Billion and counting with the Chinese workers being denied basic workers rights. These facts all contribute to an economic catastrophe taking place today. If changes are not made soon the global economic outlook is bleak indeed.

What is needed today is for the United States to step up and renegotiate the North Atlantic Free Trade Agreement where instead of a Free trade agreement usher in an Equal Trade Agreement. This would ensure that all countries contribute the resources needed to promote economic growth while at the same time preserving the environment. The next step the United States must join with Mexico to foster industrial growth thus improving the available employment opportunities with real living wages. Only when people are employed with incomes to match the cost of living in any area will crime and corruption be reduced. The United Nations with the World Bank have to create an international regulatory system that monitors and challenges all national regulatory systems to prevent an economic crisis that the United Stated helped create.

Using the Williams Recovery, Rejuvenation, and Growth economic stability flow chart as the guide for nations economic prosperity will enable and empower not only the United States but other nations as well to begin to recover from the economic fallout of 2008. In the United States the implementation of National Economic Reform and it’s Ten Articles of Confederation in conjunction using the Williams Economic Flow chart America is assured of stepping back from the edge of our financial and economic cliff. That cliff today is where we are precariously close to falling over into the Abyss.

Using two basic rules as guides for economic growth and stability, one based on the percentages of various types of employment and the other on the two types of goods and services produced either exported or imported will secure economic growth. In rule one: the percentages of manufacturing jobs has to equal 60% of all available jobs. Two: Retail industries have to equate to 18% of jobs. Three: Service and information now has to equal 12%. Finally, hospitality industries add 15%. Using this flow chart as a guide in employment distribution along with a very strict adherence to Exports of goods and services produced at 2/3 while Imports at 1/3 will produce the economic balance that is needed especially for the United states.

America must lead the way for a successful global economic network between all nations and that starts at home. We are already headed in the right direction but it will take perseverance and persistence to overcome the daunting task that lies before us. Simultaneously the United States has to reduce our trade deficit not only with China but with Japan and other Asian nations. Once America achieves balance will the rest of the world begin to realize more economic growth and strive for political and national stability. But, this can only happen if the United States implements National Economic Reform’s Ten Articles of Confederation.

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The Funding of Social Programs in Jakarta, Indonesia

When a Government provides social benefits to its citizens, one must always ask, where does the money come from? In my previous article we’ve listed all the social programs carried out successfully by the Indonesian Governor Mr.Basuki T Purnama in Jakarta. In this article we are going to see the way his social programs are funded.

Taxation:

Jakarta’s taxation consists of Income Tax, Local Tax and Central Government Tax. Income Tax employs a progressive rate commencing at 0% sliding to 30% per annum. Companies are taxed at a rate of 25% which is interestingly less than the US Corporate Tax rate of 40%. Land and Building Tax are calculated based on NJOP which is a value less than the market price. In Jakarta, land tax is 10% of the Government calculated NJOP. This tax is mainly applicable to those of the middle class and upwards. When the land and building value is less than US $ 77,000 or 100 meter square, the poor are exempt. Indonesian policy makers appear to understand the correlation between taxation and economic growth; where the more you tax the less growth you can expect.

Partnership with the Business Sector:

To expand its economic growth, Indonesia has been very open and friendly to businesses. Governor Basuki T.Purnama, an ex business man himself, has a unique and smart way of involving the business sector to finance his social programs. For example, there is a mega project underway for the construction of a complete new district on its northern coast of Jakarta covering a total area of 450 hectares. This project includes reclamation of 160 hectares to create artificial islands and a Giant Sea Wall off the coast of Jakarta. The master plan is geared toward the development of housing for the rapidly growing population and to protecting Jakarta from flood due to the rising sea-level. This project is temporarily on hold due to political reasons. However, Governor Basuki would require 5% of the reclaimed land to be handover to the City administration, and 15% additional contributions from the developers in exchange for the principle and execution permits. Out of the 15% contribution, the administration requires developers to carry out flood prevention work in North Jakarta. Among the choices were installing or creating water pump houses, dredging rivers, extending dikes, constructing inspection roads, or building low-cost apartments for the city. The figure of 15% was considered by taking into account the need for the developers or businesses to make money and profit; thus worth their investment.

Governor Basuki also uses CSRs (Corporate Social Responsibility) funding for his other social projects. CSR is a legally required monetary contribution from corporations to government social projects; which at the same time they are rewarded by getting certain government facilities that creates exposure and demand for their products and/or services which result in a win-win situation for both sides. The Governor requires companies to pay up to 3% of their net gain. The funding from CSR has been used by Governor Basuki to maintain and improve the city public transportation, public parks, roads and other social projects.

Transparency, Improved Technology and Bureaucratic Reform.

Governor Basuki provides efficiency and transparency to eradicate corruption by insisting the implementation of an Electronic System for all government transactions, delivery of services, procurement and tax collection. He also increased salaries and allowances comparable to, or even higher than the private sector on a system based on Merit. On the other hand he did not hesitate to overhaul the massive bureaucracy by firing thousands of city employees and removing 751 structural positions to becoming functional positions. This policy has proven to be a huge saving for Jakarta.

Results:

Due to its modest tax rate, Jakarta has an economic growth of 6% in 2015 and it keeps growing. It’s a better performance compared to the Scandinavian Democratic Socialist countries. Steady increase in economic growth, corruption free, and effective business partnership combined with a well-aimed, well-managed, effective distribution of the social benefits, are factors helping Governor Purnama aka Ahok to become successful with his social programs in Jakarta.

Like any other country and system, Indonesia must have its own challenges. In the next article we are going to examine the challenges to the Indonesian Socialism and how would it affect its viability and sustainability.

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